The S&P 500 fell 3 per cent while the technology-heavy Nasdaq Composite dropped 3.4 per cent – the biggest one-day declines since September, 2022. Japan’s main stock index fell 12.4 per cent, the largest decline since Black Monday in 1987. Canadian markets were closed for the August long weekend.
“The key risk to our view is that the disorderly market reaction itself, if sustained, will feed through to a higher chance of recession,” Stephen Brown, deputy chief North America economist at Capital Economics, wrote in a note to clients, which put the odds of a “hard landing” for the U.S. economy at 27 per cent.
Still, the rise in unemployment breached something called the Sahm Rule, named after former Fed economist Claudia Sahm, which is seen by many as a reliable predictor of recessions. And it caused investors to second-guess their expectations of a soft landing, where inflation falls and interest rates decline in an orderly manner, without the economy cratering.
Central banks around the world are walking a tightrope. Inflation has come down considerably, and most economies have avoided the recessions that economists were predicting a year ago. The concern now is that many central bankers have been too slow to begin bringing interest rates back to a more normal level, making a downturn much more likely.
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